The removal of a "major overhang" on cash means an upgrade for iQiyi ( NASDAQ: IQ ) at Morgan Stanley, which sees some pressure relieved that will allow focus on growing earnings.
The stock has faced cash liquidity worries over the past 12 months, the firm notes, but that was mitigated by two recent capital raisings: a $500M issuance of convertible bonds, and an offering of 76.5M American Depositary Shares . That ADS offering spurred a double-digit decline Tuesday .
"We think it is time for the market to focus on IQ's earnings growth as it enters an up-cycle, sustaining its profitability improvement into 2023," though the long-term outlook is still uncertain, Morgan Stanley said, upgrading the stock to Equal Weight.
Solid content cost control allowed iQiyi to break even in the first quarter of 2022, and improve steadily in the second and third quarters. The fourth quarter showed drama viewership and user growth were still strong, pointing to further growth, the firm says, with momentum set to continue into 2023.
While the company can likely keep raising average revenue per user at 5-6% per year, Morgan Stanley is "cautious" on churn in a hotly competitive industry with hit-or-miss content risk. Overall, it expects compound annual growth in revenue of 9% from 2022-2024 - lower than the 12-14% it expects for rival offerings at Tencent ( OTCPK:TCEHY ), Kuaishou ( OTCPK:KSHTY ) and Bilibili ( BILI ).
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Morgan Stanley upgrades iQiyi after offering removes cash 'overhang'